Correlation Between Regional Bank and Emerging Markets

Can any of the company-specific risk be diversified away by investing in both Regional Bank and Emerging Markets at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Regional Bank and Emerging Markets into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Regional Bank Fund and Emerging Markets Fund, you can compare the effects of market volatilities on Regional Bank and Emerging Markets and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Regional Bank with a short position of Emerging Markets. Check out your portfolio center. Please also check ongoing floating volatility patterns of Regional Bank and Emerging Markets.

Diversification Opportunities for Regional Bank and Emerging Markets

0.43

Correlation Coefficient

Regional Bank  Emerging Markets

Very weak diversification

The 3 months correlation between Regional and Emerging is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Regional Bank Fund and Emerging Markets Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerging Markets and Regional Bank is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Regional Bank Fund are associated (or correlated) with Emerging Markets. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Emerging Markets has no effect on the direction of Regional Bank i.e., Regional Bank and Emerging Markets go up and down completely randomly.

Pair Corralation between Regional Bank and Emerging Markets

Assuming the 90 days horizon Regional Bank Fund is expected to under-perform the Emerging Markets. In addition to that, Regional Bank is 1.68 times more volatile than Emerging Markets Fund. It trades about -0.06 of its total potential returns per unit of risk. Emerging Markets Fund is currently generating about 0.13 per unit of volatility. If you would invest  867.00  in Emerging Markets Fund on December 25, 2024 and sell it today you would earn a total of  57.00  from holding Emerging Markets Fund or generate 6.57% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.33%
Values	Daily Returns

Regional Bank Fund  vs.  Emerging Markets Fund

Regional Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Regional Bank Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Regional Bank is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Emerging Markets

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Emerging Markets Fund are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Emerging Markets may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Regional Bank and Emerging Markets

The main advantage of trading using opposite Regional Bank and Emerging Markets positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Regional Bank position performs unexpectedly, Emerging Markets can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Emerging Markets will offset losses from the drop in Emerging Markets' long position.

The idea behind Regional Bank Fund and Emerging Markets Fund pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.